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Prepaid Card Use on the Rise Among Unbanked and Underbanked

posted by Pamela Foohey

Prepaid CardLast week, the FDIC released its 2013 National Survey of Unbanked and Underbanked Households. Some of the Survey's results were similar to the FDIC's 2009 and 2011 surveys. 7.7% of households were unbanked. Another 20% of households were underbanked. I took note of the Survey because its maps of unbanked and underbanked rates by state have been receiving some attention online. But what I think is more intriguing are the Survey's questions about prepaid cards.

General purpose reloadable prepaid cards, though still a small segment of the consumer financial
products market, have grown rapidly in past years -- from $28.6 billion in 2009 to close to $65 billion in 2012 (as previously discussed). Consistent with this growth in dollars, the Survey found that prepaid card use had increased among all households from 2009 to 2013 -- from 9.9% to 12%. More interestingly, the share of unbanked households that used prepaid cards had increased more dramatically -- from 12.2% in 2009 to 17.8% in 2011 to 27.1% in 2013. By comparison, 19.6% of underbanked households and 8.8% of fully banked households had used prepaid cards in 2013. When combined, unbanked and underbanked households comprised the majority (55%) of prepaid card users in the previous 12 months.

What unbanked and underbanked households used prepaid cards for also differed from banked households. Prepaid cards could function as a substitute for bank accounts, providing the unbanked and underbanked with a safe place to receive and store money. (Caveat is that accompanying fees are understandable and "reasonable" -- see post from several years ago about the card that Russell Simmons was (and still is) marketing.) And this is how unbanked and underbanked households reported using prepaid cards: for financial transactions, such as "to pay for every day purchases or bills," "to receive payments," and "to put money in a safe place." In contrast, banked households were more likely to use the cards "to send or give money" or for some other reason, and also less likely to reload the cards. Think holiday gift for your assistant. These figures suggest that perhaps prepaid cards are beginning to serve as the leading alternative to maintaining a bank account for households that lack access to bank branches or do not want to open an account.

In addition, the majority of unbanked and underbanked households obtained their prepaid cards from non-bank locations, such as large retail and department stores and convenience stores, evidencing a need that mainstream banks are not meeting. Postal banking has been mentioned often lately, including in conjunction with prepaid cards, but I'll mention it again -- postal banking?

Finally, the Survey contained a new question about why households entered or exited the banking system. The leading answer for entering: the need to receive direct deposits. Which may provide a link to prepaid cards and mainstream banking. The Survey suggests that employers be educated about the use of direct deposit, which would force some unbanked and underbanked to become banked. There also may be a subtler nudge toward mainstream banking for those employers and employees who do not want to use direct deposit. Employers could offer prepaid cards from banks (perhaps provided the cards meet FDIC guidelines). Almost half of unbanked households that used prepaid cards reported wanting to open a bank account in the future. Employer "offered" bank cards may give households sufficient exposure to mainstream banks that in the future they may be more likely to open a bank account, and perhaps as importantly, keep the bank account even as they transition in and out of the workforce, which was the leading reason why households left the banking system.

Prepaid card image courtesy of Shutterstock.

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